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Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to your host, Mr. Lloyd Midwinter. Sir, you may begin.
Hello, and welcome to AkzoNobel's Investor Update for Q2 2020. I'm Lloyd Midwinter, Head of Communications and Investor Relations. Today, our CEO, Thierry Vanlancker; and CFO, Maarten de Vries, will guide you through our results. We'll refer to a presentation, which you can follow onscreen and download from our website, akzonobel.com. A replay of this webcast will also be available. There will be an opportunity to ask questions after the presentations. For additional information, please contact our Investor Relations team. Before we start, I would like to remind you about the disclaimer at the back of this presentation. Please note, this also applies to the conference call and answers to your questions. I now hand over to Thierry who will start on Slide 4 of the presentation.
Thank you very much, Lloyd. Hello, and a very warm welcome to all of you on the call. Life here in Amsterdam seems to slowly return to a sense of normality, but we do realize the situation is very different in other parts of the world. So I sincerely hope that you and your loved ones are safe and well. As announced last week on Monday, market headwinds related to COVID-19 eased for AkzoNobel during the second quarter, starting the quarter with a revenue 30% lower in April before moderating to revenue 20% lower in May, and finally, 5% lower in June. Despite these challenging circumstances, our business return on sales increased 30 basis points to 14% for the second quarter due to strong margin management and cost savings. The total cost savings that we delivered were EUR 116 million in the quarter, of which EUR 38 million were structural cost savings related to our transformation initiatives. Our strict temporary cost-saving measures delivered EUR 78 million during quarter 2. We have been able to maintain a strong balance sheet due to vigorous cash management and robust working capital controls while using some of our balance sheet strength to ensure supply or support customers throughout the period. Our net cash from operating activities more than doubled to EUR 308 million compared to EUR 150 million (sic) [ EUR 152 million ] last year. These results put AkzoNobel in a sound position to deal with the continued uncertainty from COVID-19 as we strive to deliver powerful performance as a front-runner in our industry. I am extremely proud of our teams around the world. They've continued to focus on serving our customers and delivered this resilient performance while also helping many communities around us affected by the pandemic. The agility of our teams to respond quickly to the sudden changes in end market demand has been truly impressive. Some key financial highlights are shown on Slide #5. Our recent results show how we are weathering the COVID-19 storm. As mentioned, our return on sales, excluding unallocated cost, increased to 14% versus the 13.7% for the second quarter of 2019. Return on investment, excluding unallocated cost and invested capital, was also up at 17.4% as compared to 16.5% last year. Price/mix was 2% higher due to our continued focus on margin management. Free cash flow increased 147% for quarter 2, demonstrating how we've been carefully managing cash and working capital. Adjusted earnings per share from continuing operations was up 8% at EUR 1.51 for the first half of 2020. And we've maintained a very strong balance sheet with net debt/EBITDA leverage ratio of 1.4x at the end of June. Slide #6 shows how market headwinds have eased during the quarter. Demand for Decorative Paints rebounded strongly in Europe and faster than company planning assumptions. By the end of the second quarter, China had almost recovered to previous levels, although other regions continued to be impacted by varied degrees of lockdown, especially India and South Asia and some places in South America. As expected, demand for Performance Coatings continued to improve during the quarter, although remaining significantly below the previous year, especially for automotive- and aerospace-related markets. Now turning to Slide #7. COVID-19 will continue to impact the second half of 2020 although, more than ever maybe, demand trends differ per region and segment in an uncertain macroeconomic environment. Looking forward, we extrapolate the current COVID-19 situation as a basis for our planning assumptions. Demand for Decorative Paints has rebounded strongly in EMEA, supported by the reopening of distribution channels, especially for the do-it-yourself segment. In China, demand for Decorative Paints has almost recovered towards previous levels. While demand for our Industrial Coatings business has been lower overall, positive trends continue for the Packaging Coatings segment in that business. Powder Coatings continues to be impacted by lower demand from the automotive industry, and volumes for Marine and Protective Coatings remained lower with demand for Protective coatings impacted more than Marine Coatings. Demand for Decorative Paints in Southeast and South Asia has been heavily impacted by market disruptions due to the lockdown of distribution channels, particularly in India. This has also been the case for South America for most of the second quarter. Automotive and Specialty Coatings continues to be the most affected business by the impact of COVID-19 and market demand remains depressed, particularly automotive and the aerospace industries. While we expect vehicle refinishes to recover mostly by end of 2020, we believe the automotive and aerospace markets may take until 2022 to fully recover. Moving now to some of our key actions and achievements, as shown on Slide #8. We've continued delivering strong margin management with price/mix up 2% for the quarter. In March, the significant market disruption from the pandemic forced us to pause key parts of our transformation, especially the ERP integrations and major Global Business Services transitions. We are now selectively restarting key parts of our transformation. The global weekly demand and supply cycle put in place for COVID-19 will be incorporated into our integrated business planning process going forward. This will allow us to respond quickly to changes in end market demand as that proved very useful during the second quarter. It was instrumental to manage both cash and supply during an exceptionally uncertain period in April and May. Our improving systems platform facilitated up to 14,000 AkzoNobel employees, or roughly 40% of our workforce, to work remotely without interruptions during the second quarter. The steps we've taken to rapidly reduce costs delivered EUR 116 million cost savings during the quarter, of which, as earlier mentioned, EUR 38 million were structural savings related to our transformation initiatives. From a procurement perspective, with the demand-and-supply balance complex and constantly evolving, we've successfully worked together with our key vendors to secure supply in these challenging circumstances. During recent months, we extended our Paint the Future challenge to employees to capture some of the collaborative innovation taking place in response to COVID-19. We received nearly 200 submissions from colleagues around the world, of which we start implementing the key winners in the second half of this year. And last but not least, I'm proud to confirm we received the highest possible ranking from MSCI, a AAA, for the fifth year in a row in recognition of AkzoNobel being the industry leader when it comes to environmental, social and governance performance, ESG. We will continue to lead the way when it comes to sustainability in paints and coatings, demonstrated by our recently announced ambitions to become a zero waste company and cut carbon emissions in half by 2030. I'll now hand it over to Maarten, who will run us through the financial results in more detail from Slide 10 and onwards.
Yes. Thank you, Thierry, and hello, everybody, on the call. In the second quarter, revenue was 19% lower and 17% lower in constant currencies with positive price/mix of 2% more than offsetting the 18% lower volumes. Adjusted operating income was EUR 238 million with strong margin management and strict cost-saving measures helping to compensate for lower end market demand. This resulted in a return on sales, excluding unallocated cost of 30 basis points higher, at 14% for the second quarter of 2020 despite the significant market headwinds from COVID-19. Operating income of EUR 207 million includes EUR 31 million negative impact from identified items related to transformation costs. As a reminder, operating income in the second quarter of 2019 included EUR 3 million positive identified items. Moving over to Slide 11, which shows the quarterly trends in volume and price/mix. Our strong focus on margin management is delivering, although volumes were significantly lower due to COVID-19. Price/mix was 2% positive for the quarter, mainly resulting from price increases implemented earlier in the year. Although market headwinds eased during the second quarter, volumes were 18% lower overall. Market headwinds were strongest during April when revenue was almost 30% lower compared to 2019. Revenue from May was around 20% lower. And June was nearly 5% lower compared to the same month of last year. Trends differed significantly per region and segment with volumes 10% lower for Decorative Paints and 23% lower for Performance Coatings. Now moving on to Slide 12. Adjusted operating income was EUR 38 million for the second quarter compared to EUR 305 million last year. Foreign exchange rates had a negative impact of EUR 8 million in the second quarter, mainly due to significant currency devaluations in South America. Margin management and various cost-saving measures helped to compensate for the EUR 242 million impact from lower end market demand as a result of COVID-19. Positive price/mix contributed EUR 39 million, while raw material and other variable costs were EUR 32 million lower. Structural cost savings related to transformation initiatives delivered EUR 38 million and strict temporary cost-saving measures added EUR 78 million, resulting in a total of EUR 116 million cost savings achieved during the second quarter. Moving now to the second quarter results for Decorative Paints. Revenue was 10% lower and 6% lower in constant currencies with 4% positive price/mix more than offset 10% lower volumes. Adverse impact from currencies was mainly related to significant devaluations in South America. EMEA delivered a particularly strong performance as demand rebounded during the quarter supported by the reopening of distribution channels, especially in the DIY segment. By the end of the second quarter, China and Vietnam were also returning towards previous levels. However, other countries in Asia continued to be impacted by varied degrees of lockdown particularly in India. In South America, the lockdown of distribution channels for most of the quarter resulted in lower volumes. Strong focus on pricing initiatives and cost control partly offset adverse impact from foreign currencies. Adjusted operating income increased with 29% to EUR 175 million, driven by positive price/mix and cost savings more than compensating for lower volumes. Now moving to Performance Coatings on the next slide. Revenue was 24% lower and 23% lower in constant currencies, mainly due to lower volumes for all business units as a result of COVID-19. Automotive and Specialty Coatings was most significantly affected by lower demand from automotive and aerospace industries. Volumes for Powder Coatings were also lower for the automotive industry as well as due to lockdown of distribution channels and construction activities. End market demand for Marine and Protective Coatings was more heavily impacted for Protective than Marine Coatings. Industrial Coatings was least affected due to continued positive demand for packaging coatings as well as coil coatings in North America, while demand for wood coatings remained subdued. But overall, adjusted operating income was EUR 103 million compared to EUR 197 million last year as margin management and cost savings were more than offset by lower volumes. Now turning to Slide 15. Profit from continuing operations was EUR 134 million and net income attributable to shareholders was EUR 129 million, resulting in adjusted earnings per share of EUR 0.80 for the second quarter. For the first half year 2020, net income attributable to shareholders was EUR 243 million and adjusted earnings per share increased 8% to EUR 1.51. Outstanding share capital was 193 million common shares at the end of June 2020. Moving now to Slide 16. During the second quarter, we maintained a strong balance sheet due to vigorous cash management and robust working capital controls. Free cash flow increased with 147% to EUR 262 million from EUR 106 million last year. Net cash from operating activities resulted in an inflow of EUR 308 million for the second quarter, up from EUR 152 million for the same period in 2019, mainly driven by the inflow of working capital. The increase in net debt from EUR 0.8 billion at year-end 2019 to EUR 1.7 billion at June 30, 2020, was mainly due to a share buyback and the final 2019 dividend. This resulted in a net debt/EBITDA leverage ratio of 1.4x. At June 30, 2020, cash and cash equivalents were EUR 1.2 billion. In addition, we have a EUR 1.3 billion unutilized revolving credit facility with a maturity of 2025. The next bond maturity is EUR 750 million in July 2022. Overall, we target a leverage ratio of net debt/EBITDA of 1 to 2x by the end of 2020 and remain committed to retain a strong investment rate credit rating. With that, I hand back to Thierry for some concluding remarks.
Thank you, Maarten. On Chart 18, you'll see that despite lower end market demand, our business return on sales increased 30 basis points to reach 14% for the second quarter as a result of the continuous focus on margin management and our cost-saving measures. Our rigorous cash management and strong balance sheet put us in a sound position to deal with the continued uncertainty from COVID-19 as we strive to deliver powerful performance as a front-runner in our industry. And I can only repeat that I'm extremely proud of our teams around the world who have continued to focus on serving our customers and delivered resilient performance while also helping many communities affected by the pandemic and all of that in very adverse situations. Finally, turning to Slide 19, which shows our updated outlook. AkzoNobel has suspended its 2020 financial ambition in response to the significant market disruption resulting from the pandemic. COVID-19 will continue to impact the second half of 2020, although demand trends will differ per region and segment in an uncertain macroeconomic environment. Raw material costs are expected to have a favorable impact for the second half of 2020. Continued margin management and cost-saving programs in the meantime are in place to address the current challenges. We target a leverage ratio of 1 to 2x net debt/EBITDA by the end of 2020 and commit to retain a strong investment-grade credit rating. And with that, I'll hand it over to Lloyd for information about how we're going to conduct the Q&A session. Lloyd?
Thank you, Thierry. This concludes the presentation, and we'll be happy to receive your questions. [Operator Instructions] Operator, please start the Q&A session.
[Operator Instructions] Speakers, I am currently seeing 10 questions on queue. Please allow me a few seconds to get their name. One moment. Thank you for waiting, speakers. Our first question is coming from the line of Tony Jones from Redburn.
Tony Jones from Redburn. Firstly, could you talk a little bit about the divisional volume trends and how that's looking into Q3? Is the recovery you show on Slide 6 continuing or accelerating? And then on the temporary cost gains on the EBIT bridge, that was a big number in the quarter, nearly EUR 80 million. Could you help us understand a bit more how much of this relates to volumes? So could quickly disappear as recovery comes through. And how much of it could be a bit more sticky? So discretionary spend that you've now found that you can live without.
Yes. Thank you, Tony. Well, I suggest that I'll take the volume trends and then, Maarten, if you do the cost. So that's how we split up the work around here. So on the -- going forward into the third quarter, Tony, you'll probably appreciate I'm not going to give any forward guidance because there is ongoing uncertainty, flare-ups, threats of lockdowns, et cetera, around the world. So I think it would probably not be wise to give forward-looking. But I can definitely describe the volume trends in the second quarter and then I think you guys can extrapolate what that would mean for the third quarter. If you look at the volumes, I think there's obviously a big division or difference between, on the one hand, Decorative Paints, and on the other hand, Performance Coatings. So maybe it's good if I focus in a little bit on Decorative Paints in some detail. Let me start with what the downsides were in the second quarter and where they were at the end. Definitely, Latin America started extremely dire situation in the beginning of the quarter. That actually subsisted for almost 2/3 of the quarter with only, I would say, near the end of June having places like Brazil and Argentina coming out of really strict lockdowns, in Brazil, specifically, in the urban areas, which is a big business part for us. So they were coming out of it. But that was really depressed during most of the second quarter. On the -- also the more depressed part of the spectrum, in Southeast Asia, somewhat of a similar pattern. I would say there India continues to be a challenge because there, specifically, in the urban areas, there are still quite some lockdowns happening. So India is in Southeast Asia behind. But if you look at the other 2, I would say, important countries in that region for us, Vietnam and Indonesia, they're definitely looking up as we came out of the quarter. China, we've commented on that. Deco China was almost back on previous year's levels, a pretty good dynamic. And as far as we can notice, the Beijing flare-up seems to be under control. The flooding that is happening in parts of the country seems to have little impact on it. So we expect that, in fact, China is getting increasingly to business as usual as far as Decorative Coatings is concerned. The biggest, I would say, wildcard in the second quarter was Deco in EMEA for 2 reasons. One, the professional market had started out for us pretty strongly in the first quarter. Already, we commented back on that, that we were -- as the market leader, we were also riding pretty strong in the first quarter. For the professional market, which means the painters who come at your house or in a commercial building to paint, that continued, albeit that in the residential area it went more for external paint, probably because people were locked down in the house, they felt it was the right time to do something, but not necessarily want to have a group of painters in the house. Sounds a trivial comment, but for a supply chain it was a big challenge because you go from wall paint to mostly now wood trim and metal coatings on the outside or [ facade ] paints, which supply chain-wise is different product. Do-it-yourself in Northwestern Europe was significantly up. So obviously, the lockdown, the trend -- the house improvements, which you see in other market segments related to house improvement, they were definitely going strong. And that has continued, as you'll see in our chart through the end of the second quarter. By the way, if you ask guidance for the third quarter, I would like to have guidance from my business guys also in the third quarter because it all really depends on is it going to be, in Northwestern Europe, is it going to be more staycations than going on travel? Are people continuing to stay more at home? Are people going to take vacations? There are some countries who talk about maybe they shouldn't take their traditional vacation periods, et cetera. So the only thing that we could respond to is having a very agile way of supplying products, which has been quite challenging given the wild rides we had. So on Deco, I think, Tony, if you -- I hope you accept it that I only give you the dynamics as we got out of the quarter and then you can extrapolate, I think, what it would mean for the third quarter. Moving to Performance Coatings. There you have a very big spread on how things -- an equally big spread. As we commented before, not surprisingly, markets that are related to automotive and aerospace are significantly depressed. They're probably the most down in the portfolio. Again, for us, aerospace and automotive, the total exposure for us is in the -- yes, I would say somewhere between 10% and 20%. So it's somewhat oversee-able but, definitely, it is an impact. We did not expect that necessarily to change significantly in the third quarter. And in fact, for aerospace, if you look at all the experts, their comments, they see that more coming back even late in '21 or even '22. So we'll just have to deal with that. It gives a big mix change in our Performance Coatings business. If you then go to Powder Coatings, I would say, except for the automotive part where we're supplying typically Tier 2 or Tier 3 suppliers, so you have the whiplash of the stop-and-go in that supply chain, except for that, actually, things were very much picking up as usual near the end of the quarter. So that was very positive. If you go to Marine and Protective, we commented on that in the prepared comments earlier on in this call, where Marine is more or less steady as it went with some differences in region. In Protective, we've seen a bit of a halt, probably also people in the customer level managing their cash. We do believe that on the MRO part of it, though, that might actually be coming back. And most of our exposure in Marine -- in the Protective business is related to natural gas and long-term projects, so these are ongoing because they're really going through the whole cycle. So don't expect big changes there. Then last but not least, if we go to our Industrial Coatings business, there, I would say, you have different variations. Packaging business continues to do very well. That's a combination of that industry doing very well, but also our -- what we believe is an increase in share base on customer service and based on new technologies that we've launched forward. So there, we remain pretty optimistic. Wood coatings continues to be where they were. That was a market that was somewhat impacted given the China, Southeast Asia, U.S. situation that hasn't changed necessarily. And if you go to then the coil coatings market, was relatively robust overall globally, although there was quite some, near the end of the quarter, although there were notable regional changes in that. Now do we expect big changes in those trends? No. The big question mark for us is, is there going to be a lockdown? Is there a second wave? Is it flare-ups? So we will continue to have the same management principle as we had during the second quarter, very conservative on cost, and that is a bridge to Maarten, but at the same time also having the weekly supply/demand with quite significant changes week-over-week on what product we make where so that we can keep supplying our customers.Maarten, maybe you want to comment on the cost?
Yes. On the cost savings, as you've seen, EUR 116 million total cost savings, EUR 38 million really structural and related to our transformation. And that's basically very much tracking against the EUR 120 million cost savings for this year or tracking against the total announced EUR 200 million for last year plus this year. As you mentioned, EUR 78 million more cost savings of a temporary nature. If you kind of unpeel this, the big buckets is clearly travel and entertainment. Clearly, there is very limited travel. So that is one area. The second area, we've also clamped down on advertising and promotion given the state of some of the markets. The third area is really around temp labor, third-party labor, consultancy spend, et cetera. So we have been really in a mantra to basically clamp down on any discretionary spend. And then last but not least, as you said yourself, of course, there is also some volume -- linked to volumes, which is mainly in our distribution and warehousing costs. But the earlier 3 buckets are really the big buckets. Going forward, we will manage that in a very flexible way. So we will flex our cost as we go along and depending how the business will evolve. So executing on the EUR 120 million cost savings and be flexible on kind of the discretionary spend where required and where needed. Does that help, Tony?
Yes. Maybe, Tony, if you allow me to do one additional comment. So you know that in the end of '18, early '19, we announced a EUR 200 million cost-saving program. You may remember, we did EUR 80 million in 2019. We said we still had EUR 120 million to do. And in fact, I think, despite us announcing we stopped key parts of our transformation, I think we are very encouraged that we are almost exactly halfway, I mean, on the EUR 120 million to do. So we remain on track on what the cost is concerned there.
And our next question is coming from the line of Gunther Zechmann from Bernstein.
My question is on raw material costs, please. You had EUR 32 million benefit in Q2, which is less than what you had in Q1, it was EUR 50 million at the time. So what's changed that this tailwind has reduced somewhat in size? That's the first part of the question. And the second one, if you could help us a little bit with what your planning assumptions are, given that you have certain inventories, you have certain procurement contracts, what raw material costs you're expecting the remainder of the year?
Yes. Gunther, thanks for the question. On raw material, indeed, EUR 32 million for the second quarter, and indeed, as you said, EUR 50 million for the first quarter. I think a few elements play a role here. First of all, in the second quarter, this is obviously related to raw material pricing by the end of last year, which is flowing through our P&L. But I think even more important, we compare here the second quarter, which is -- has a lot of dislocations. We compare that to the second quarter of 2019 with also a significant different mix. So just to kind of extrapolate the first quarter to the second quarter where the second quarter has significantly different mix and different volumes that is impacting the EUR 32 million basically going to raw material savings. Now if you move forward for the second half, we've said that we still see a favorable environment from a raw material perspective. That is based on the development of raw materials, which we've seen in the first half. Although I think it's also good to mention here that we've also seen and managing quite some supply-and-demand kind of disruptions and dislocations, which sometimes also leads to higher costs. So it's not kind of a straight line going forward. But again, we foresee still an unfavorable environment for the second half.
It's important, Gunther -- by the way, good morning, but it's important indeed to stress also the volume part. Don't underestimate the volume part there. So by definition, the total amount of savings on raw materials is already impacted quite significantly by the volume. We did indicate in our outlook that we do expect some favorable impact from raw materials going forward. Maybe just to add to what Maarten said, 2 dynamics there. One, yes, there is less demand in the market, so that always has a favorable impact on raw materials for what we are concerned. Secondly, though, we do see quite some disruptions in supply chain where some of the step-downs for some of the raw materials that are related to us are stepping down to such an extent that some people take out capacity. So that's why we are guarded optimistic because there's quite some dynamics playing out there. Does that answer your question, Gunther?
Yes.
And our next question is coming from the line of Christian Faitz from Kepler.
Yes. Christian Faitz from Kepler. Two questions, please. First of all, what is the nature of the EUR 31 million transformation costs? Is that, for example, consultancy fees and new IT system implementations? And the second question, in Deco, I remember your DIY professional mix tends to be 50-50 in a normal year. So what was the weighting in Q2? Was it more like 60-40, 70-30 in terms of demand trends?
Thank you, Christian. I suggest, Maarten, you take the first question?
Yes. Christian, on the EUR 31 million transformation cost, so this is mainly related to transitions, which we already started in the first quarter and continued in the second quarter, and it's mainly related to the finance transformation transitions to our Global Business Services. Secondly -- the second part is related to our footprint optimization and the actions, which we continued in that area. And again, this also -- these all drive the structural savings, which we just discussed.
Yes. So Christian, let me talk about the -- because I think your question was around the percentage or the size of DIY in our Deco business, maybe taking 2 steps back so that we all keep ourselves on the same page. If you look at the Deco business, the DIY is actually only a European phenomenon largely. I mean the rest of the world, they actually -- either they buy their paint or they bring a painter in. But DIY is really a European phenomenon, not even EMEA, but European. If you go, you're right, the DIY, 40% in EMEA. So I just want to point that out, 40% of the European business is, indeed, correct assumption for do-it-yourself. Now if you really want to get really more specific, I would say 40% is it truly do-it-yourself, you and I get into the car, drive to a store or whatever or to a big box and we buy our paint. 35% is the professional business. And then you have in the middle, you have a 25% of what I would say, kind of a hybrid zone where it's called the buy-it-yourself. The consumer goes alone or with a painter, buys the paint and then the painter puts it on. So that has some of the characteristics of do-it-yourself, but it's a little bit different sometimes. So that is probably the best description of how the market is structured. Again, this applies for EMEA, which is, let's say, about 1/2 of our business worldwide in Deco.
Okay. But it would be fair to say there was a significant shift in Q2 in EMEA towards DIY, right?
Well, DIY was strong. So I think that was actually up. But having said that, don't underestimate the professional business. It was actually doing quite well. I alluded to some of the changes of being in-house, out of the house. But the professional business in Europe was actually pretty strong from the beginning of the year. But yes, I mean, given the situation, the percentage, I don't have the exact percentage here at hand, but you would say DIY was probably a couple of percentage points higher.
And our next question is coming from the line of Mubasher Chaudhry from Citi.
Just 2, please. The first one is on the price/mix dynamic within Performance Coatings. I just wanted to get your comments on how you expect that to trend going forward given the lower volumes at large customers who know that your raw materials are coming down. So I just wanted to get your kind of feel of how you see that trending forward. And then the second question is more around the sustainability of the free cash flow. It was particularly good in the second quarter. How should we think about that going forward into the second half? Do you expect to hold on to the kind of gains that you've seen in the second quarter? And then if I could squeeze one in for -- on cost savings again. Would you be able to provide any comments on, given that you're at 50% of the EUR 120 million by 2Q, is that 15 by 20 still delayed? And are you -- are you still planning to achieve the EUR 120 million of cost savings in 2021? Or is there potential to complete that earlier?
Yes. All right. So let me maybe -- well, let me tackle the last question first and then I'll do the price/mix, and Maarten, if you can do the free cash flow one. On the cost savings, yes, I mean, when we said we were halting parts of our transformation, that was more on the -- pure logistically, given that an ERP rollout around the world is a bit difficult to do over the phone, although Maarten's team was able to do that in Egypt completely virtually, but I'm not sure that we can do that everywhere necessarily. The big transitions for our Global Business Services with the training, handovers, et cetera, to centralize the task, this was obviously pretty difficult to do in the second quarter. But as you indeed see from our cost saving -- and our structural cost savings, the underlying drive to get our cost structure much more performance and much more aligned with what our company should have, that has gone on without any issues. Now coming back on the 15 by 20, we paused that. There was 2 reasons for that. Not that we didn't feel like 15 was impossible, but we would have done -- had to do it with really strict impact in the organization, given that the top line was going to be under pressure. We didn't think that was in the medium interest of the company. And in fact, that has helped us quite a lot because if -- again, the supply chains have been wildly swinging. So sometimes you had people sitting at home, which we had to call the next morning to come in and actually do overtime in certain plants. So by having the approach we took to keep as many of our people in the boat was probably the right approach also business-wise for what we did. But of course, as said, this COVID-19 impacts us in the full big quarters, second quarter -- okay, the 15 by 20, we said, look, we'll see where we come out, and frankly, the second half of the year still has some uncertainties with further flare-ups, lockdowns, et cetera. So that's why we continue to say that we suspended our 15 by 20 guidance. But in that sense, you see that with the 14% this quarter, we don't stop pushing for the maximum number we can achieve. So that's on the cost savings. On price/mix, the number is probably less telling than otherwise because there's mix swings in that. If you have businesses like vehicle refinish, that tends to have a relatively high sticker price. If that becomes less in your portfolio, you start having all sorts of shifts happening. So it's a number that really is not that easy to interpret. On price/price, I think we held very firm. Now your question was around bigger industrial customers. I do believe that, that has been relatively well managed by our teams so far. If there were more pressure, as we've indicated already before, we were holding quite firm. But we definitely -- and that was part of the reasons to focus more in some segments on margin management, we really go to what is the margin we generate and there are certain contracts that actually related more directly to raw material. But I do not expect a major shift there, if that is your question. And by the way, in Deco, you didn't ask that question in Deco, I think we seem to be increasingly successful to decouple raw material dynamics from our pricing in the market, which I think is a very positive trend that we have there. Maarten, maybe you want to talk about the free cash flow question?
Yes. Yes. On the free cash flow, free cash flow, first of all, was strong in the second quarter despite the fact that, of course, we've seen working capital running upwards. You've seen 17.4% at the end of the second quarter. Specifically, receivables we saw during the quarter, quite an uptick, as we have, in a number of cases, extended our terms to support our customers and also customers who were not able to pay because of lockdown, et cetera, et cetera. That has been trending down again by the end of the second quarter, but we still see the impact at the end of the second quarter. So for the second half, working capital remains a key focus area, specifically focusing on getting receivables back on track again, I would say. So there is no reason to not expect continuous strong free cash flow. Although I'd like to mention here that we had, in the second quarter, some deferrals of kind of tax and VAT, social security payments, which will flow from the second quarter into the third quarter.
Does that answer your question?
Yes. Very clear.
And our next question is coming from the line of Laurence Alexander from Jefferies.
Just a simple question on the COVID-19 scenario discussion in the Q2 report. What's the -- how much of your experience and forecasts went into the 2021 to 2025 growth assumptions that you used as a base case? And how do you think about your degree of confidence in that -- in those assumptions or the degree of conservatism embedded in them?
Yes. So that is indeed related to the goodwill impairment testing. And what we've done here is basically taken an assumption on GDP and used that in the model for the goodwill impairment testing. And I think it's fair to say that when you do these goodwill impairment testing, you stay at the conservative side.
Our next question is coming from the line of Laurent from Exane.
My first question is on inventory levels. Could you give us a bit of a tour around the different regions for Deco and different businesses in terms of inventory levels in the channels? And then the second question, on capital allocation. Could, you talk -- I think last time on the Q1 call, you talked about, I guess, the need to have more visibility on the shape of recovery and how you would manage in the crisis to think about buybacks on one side and M&A on the other side. I was wondering if you could give us a bit of an update on that side. And any update on the M&A pipeline as well would be appreciated.
Yes. Thank you, Laurent. I think your question was specifically around what's happening in the channels on inventory, correct? I mean, did I understand your question correct on inventory?
Yes. I mean you mentioned some destocking, I think, more on the Performance side. I was wondering where you think you are now. And on the Deco side, I guess it's more on the retail side. So I've got experience from the U.K. side and the French side and it's tough to get paint. I'm just wondering elsewhere how inventories are at this point in time.
That's good. Laurent, you have friends in good places in paint companies. So if you need something, we can help you out if you need more paint. But just kidding apart, so I think on the destocking, I mean, I think that goes, in general, for both in Deco and in our Performance Coatings, the channels are definitely at the low side of being stocked, I would say, in certain places. Now of course, the comment you just made anecdotally on finding paint is probably very specifically in retail in Northwestern Europe where there has been a bit of a run on paint, so that is definitely pretty noticeable. If you go into the rest of the world, we do monitor in Deco, of course, the sellouts to customers and then the sell-in from us. And that seems to be either the selling in is still kind of -- it's more or less synchronized so -- or there is even a little bit of restocking happening as we speak. So I think it's pretty stable. So that's good. I think people have been managing and also in our customer level have been managing their stocks and their cash. So I think it's pretty natural that there is a bit of a replenishment over time happening. But I wouldn't -- I think that's going to be a minor effect in -- up or down in our numbers. The same is actually in Performance Coatings. Now Performance Coatings is different. Most of it is direct sales. So that goes pretty quickly. So there, actually, for us, inventory effects are much less. Does that answer your question on the first part, Laurent?
Yes, yes.
All right. So Maarten, you want the...
On capital allocation, yes, basically, I want to reconfirm our capital allocation priorities where we focus, first and foremost, on our organic growth, and of course, in our CapEx deployment; our dividend policy, which is stable to rising. M&A, we keep on looking at M&A opportunities, specifically M&A bolt-on opportunities, although fair to say that would be coming more towards the end of the year where we might see some opportunities coming up so -- to be seen. And then last but not least, if there is still cash available, we will obviously return that to our shareholders while, again, in these uncertain times, it's also important that we keep flexibility. But again, we have reconfirmed to move to a leverage ratio of 1 to 2 by the end of the year.
I also hope, Laurent, that you also understand that the third quarter is still with lots of uncertainty if you read the headlines on where COVID-19 goes. So that's why we actually want to be a little bit more conservative in these months to take any position on these things.
Understood.
Does that answer your question, Laurent?
Yes. Absolutely.
And our next question is coming from the line of Mutlu Gundogan from ABN AMRO.
Yes. Two questions on paints in EMEA. The first one is can you talk a little bit about the volume decline in the region and the differences between the various countries or the major countries? That's the first question. And then secondly, it seems that your price/mix was up significantly in the quarter, which is impressive, in my opinion. Can you split out how much of that is price and how much of that is mix?
Yes. All right. Good question. Let me tackle the first one, and Maarten, maybe you do the second one. On paints in EMEA, you have all shades you want to have from country to country. But if you stay in, I would say -- I would say, the old-fashioned definition of Europe, I would say the difference between the north and the south, in broad terms, in the south, Spain, France, Italy, actually some of the channels were completely closed. Stores were closed for a big part of the quarter. So there you saw e-business taking off quite a lot, although still being a relatively smaller percentage of the total volume. And then when the stores opened, you really saw a spike in material coming up. And a spike is an understatement, it was actually from 0 sales because they were closed to really trying to catch up with an increased demand. So that was actually pretty big. If you look very specifically for countries closer to home here, the Netherlands, Belgium, the U.K. France, you saw similar patterns. France was much more the southern European with quite some closures and then actually picking back up. The Netherlands never really closed the shops, so that was just strong throughout. Belgium was down and then stepped up quite a lot. And in the U.K., in the early parts of the quarter, there was -- it was not a mandate, but I think most of the big customers had shut down their stores. But they restarted quite strongly then somewhat as of the middle of the quarter. So in that sense, there was all differences around it. But the common pattern was definitely the do-it-yourself was very strong. And whereby the professional business was actually, for external business, doing quite well, too, and that was a continuation of the first quarter. Does that answer your question on the first one?
Definitely.
All right. Maarten?
Yes. So on the price/mix, maybe first a step back. Overall, price/mix was 2%, EUR 39 million, and that is mainly price. And as we said, we have kind of, with our pricing initiatives, we have increased our prices 1% to 2% early on in the year. If you then look at the dynamics in Deco and in Coatings. Deco, the 4% price/mix, there is clearly quite a significant mix impact and it is driven mainly by EMEA, as Thierry earlier mentioned. So I would say, more or less, in deco, it's half-half price/mix. But on the other hand, if you then take Coatings, and Thierry commented earlier on this, there is a significant negative mix impact. And that gets then again total to the 2% price/mix, which is mainly price because the mix basically is evening out between the Deco and the Coatings part. I hope that helps.
And our next question is coming from the line of Alex Stewart from Barclays.
Firstly, on M&A, on the bolt-on deals, are you finding potential sellers willing to engage in negotiation? Or are they stepping out of the market because their own businesses have probably been performing quite poorly recently?Secondly, just a question on raw materials. You talked about a benefit in the second half, which I assume is a year-on-year benefit. Can you also talk about whether you expect raw material costs to be lower sequentially after adjusting for volume and making less of it? And then this isn't really a question, it's more a clarification. But Maarten, could you possibly tell us how much the tax deferral impact was on free cash flow in the second quarter, that would be great.
Okay. Thanks, Alex. I mean there was a little bit of static on the line so we hope we get your questions right. So first of all was around M&A, I think, the willingness or the unwillingness for bolt-ons to engage. I think the other one was around the ROS sequentially, how does it look if you get it? I think you almost asked it liter per liter, I think, for us. And then the tax deferral. Let me tackle the M&A one. There is a little bit more noise around potential bolt-ons that might be, from our perspective, that might be willing to engage on conversation. It's a bit early, though, because everybody probably was hunkered down in getting their operational model functioning. And it's not always clear yet: is it really coming from those companies in certain cases? Or is it an investment banker who gets overly enthusiastic on what might happen? But we do expect that there's going to be a little bit more companies looking at is this the place we want to be, et cetera. So at the one hand, it has indeed been a very wild ride. And depending on where those smaller paints and coatings companies are sitting, they may be more impacted in the segment or the country or the geography they're in. So that obviously, yes, that creates a bit more natural conversations for people we have been contacting over a while, whether and if, et cetera. So that helps. On the one hand, I think we have a relatively good chance there because I think we have a pretty good record on integrating bolt-ons and actually trying to keep the best from the company we take over, but then plugging it into a larger group that may have some other efficiencies from scale. And at the same time, I think there is a bit of a reluctance from those owners because they feel, in certain cases, their business is down, so this is not the right moment to sell. I think in the anecdotal context, it is clear that we understand the market they're operating in. So I think we can see through on how to extrapolate their past performance on what that might be in '21 and going forward. So in that sense, I think that doesn't -- that does give a ground for having at least some initial contacts. Now in the second quarter, those things came up, but I think we are very much looking at our operational model and staying very vigilant. We have our -- we commented on that. We have a list of targets that actually would help us in -- in our segments or in specific markets and that is actually the line that we try to stick to pretty vigorously. Maarten, do you want to talk about the...
Yes, on the raw materials. Yes, I commented on that already earlier. Basically, what we see right now in the first half is really the pricing at -- from the end of last year. And earlier, I think that was more earlier this year, based on what we at that moment saw, we didn't expect any significant favorability in the second half. But given what we've seen in the development of raw materials, we flag now that we see a favorability in the second half, again comparing to the second half of 2019. Sequentially, I think it's very difficult to comment given the continuous mix changes we see at this moment in our portfolio. So I would like to refrain to comment at this stage and make any predictions. But again, we will see a favorable effect versus last year in the second half. On the deferrals of the tax payments, I mean, we've not specified this, but I just wanted to mention that there are, if you look at our cash flow, there are, of course, shifts from the second quarter to the third quarter. I mentioned what happened in working capital with our receivables. And there are also some -- so there are a number of pluses and minuses, which play through and I just wanted to flag that.
Our next question is coming from the line of Peter Clark from Societe Generale.
Got two questions. First one is the stories about Dulux being on rationing in the [indiscernible]
Peter. I'm sorry, you're breaking up.
[indiscernible] markets. I'm just wondering, with your facility now in Ashington, how you can address the Dulux situation in the U.K., this demand pull you see in Europe, Deco -- North and Western Europe Deco, how are you going to address that? Certainly, with a facility like Ashington, understand the demand-pull was so extreme that it meant stocks have fallen back sharply. Just wondering. And then the second question, your comments about not seeing recovery in auto and aerospace until 2022, specifically, the refinish business. Given the density of traffic certainly in Europe seems to be picking up back towards normal in a lot of places, just wondering if that refers to auto refinish as well on sort of prolonged recovery.
Yes. Okay. Now Peter, I think we -- you were going in and out and there were some -- so I'll have to guess what you asked, so just tell me if I'm answering a different question, but let's try to do our best. I think you talked about availability. So what you see that here and there, like in the U.K. Dulux may not have been that readily available for a period of time. And then how does that fit for our units like Ashington, et cetera? Now we did -- it has been a wild ride. So it was a whole story of trying to manage working capital, on the one hand, with customers who said they were not going to buy material to then going to, oh, wait a minute, we were just kidding. We're going to buy and we're going to buy much more than we ever did before. So our supply chain organization, manufacturing organization went from a bullwhip, which was pretty impressive. To be honest, if you look at capacity, installed capacity, it is a spike and it's always difficult to get people out of their lockdown, back in the plant, et cetera. But it was actually -- the bottleneck is not so much also can we make the paint and have it available? The whole supply chain on packaging, raw materials, et cetera, has to follow on those spikes and you have to have it in the right spot at the right time. So if you then looked to the whole supply chain, I think for a while, people were stopped and then all of a sudden had to go to much higher -- much higher production than they ever had before. So that explains the big changes there. So our installed capacity like the plant in Ashington could cope with much higher demand, but not if it's, of course, punctually going from 0 to 100 and then the suppliers can't follow. So that's -- hopefully, I'm answering the question that I think you asked on the availability of material. The other one is -- I think you referred to my comments around auto and aerospace. I think on aerospace, of course, it's not so much the passengers, but it's the amount of flights. So as that comes back, then you have to do the MRO. The OEM market may be a bit longer impact. So that was the basis of my comment. On OEM, I think there's people on the line who probably also look at the same stats for OEM builds as we are looking at. So I think my comment was pretty coherent. For vehicle refinish, you are right, it is linked -- the repair market for cars is directly linked to miles driven and density of traffic. That was down quite significantly. That is starting to come back up. And that's why I think I made a comment that near the end of the year, we do expect vehicle refinishes to get, maybe not completely back to normal, but definitely picking up significantly. So I think there was just a delay because of a couple of months of almost no traffic. And I think we just have to sit it out in the industry until there are damages coming back into the market. Now I hope, Peter, that I've answered your question because you were really out for seconds at a time during your question. Does that answer...
Yes. You did very well.
And our next question is coming from the line of Geoff Haire from UBS.
I just wanted to ask, the comment you made on having to secure supply through the procurement process, what did you have to do to secure that supply? Does that mean that you had to limit the benefit you may see from lower raw materials in the future? Or did you have to lock in the longer supply contracts at different prices than you had previously?
It was actually much less a pricing discussion, it was really are they able -- is their unit open? And if it is not open, what is another source where we can get the material? Sometimes we have replacement materials. So then if one supplier was down, okay, can we get the product in the right volume from somebody else? So it had less to do with pricing than actually just getting your hands on the material, and that has been a very active work stream from our procurement group. In some cases, there was some support needed because the suppliers couldn't get the material or they had to have help with one of their suppliers. So I think it was a much more hands-on work stream, but it didn't really have an impact on the costs necessarily, as you mentioned. Does that answer your question?
Yes. That's fine.
Our next question is coming from the line of Georgina Iwamoto from Goldman Sachs.
I've got 2 left. So the first one is, firstly, if you can confirm my very back-of-the-envelope math, you helpfully gave us the impact of the coronavirus on sales of down 18% in 2Q and then you also gave us the temporary cost savings of EUR 78 million. So if I strip those things out, that implies that underlying trends would have been up 20% year-on-year on EBIT with a margin close to 20%. I just wanted to confirm that, a, that kind of makes sense; and b, is that the kind of level of profitability you've got the organization to looking at 2021 and beyond? And then my second question is just to clarify a point. I think you were quite clear about the price/mix in Deco. But in Performance Coatings, I think talking about mix being very negative, does that imply that actually pricing was positive or at least flat?
Okay. So Georgina, I think we'll have to temper your enthusiasm on the profitability here, although I think the underlying performance was extremely strong. And I think we said that -- you saw that probably also in the first quarter, I think we do feel that the underlying, we were definitely on track on the 15 by 20. But okay, it is what it is. Now I think what's not correct in your math, I think, is quite dramatic mix shifts that have happened. So I think that's why it's difficult to just take it as one monolithic block and put it down. So I think margins were very robust, but then you really have to look what's in, what's out. So although we are extremely positive around our underlying performance and that we do believe that, that bodes well for the future, I think your numbers are slightly overexuberant, I would say. Then the second thing -- so sorry for taking your enthusiasm away in your first day in the office. Then on price/mix for what Performance Coatings is concerned, I think the -- it is fair to say that our pricing was very stable to all. So the price/price really hasn't moved at all. It is really a mix impact that you see there.
For our last question, it's coming from the line of Charlie Webb from Morgan Stanley.
Just two last ones. One, just a quantification around the kind of -- the cost savings. So if I understand correctly, you are suggesting that you're kind of on track for the EUR 120 million, I guess, structural savings, just to clarify that. And then when we think about the temporary savings, I guess, year-to-date, you've delivered somewhere close towards EUR 100 million on those kind of temporary savings. Is it kind of right for us to assume that the temporary savings for full year '20 will be in a similar order of magnitude of structural savings, obviously, very much front half -- first half-weighted? But just trying to get an order of magnitude on those temporary savings. Clearly, I guess, travel remains limited as we move into the Q3. So just -- that's the first kind of question around that. And then just on that kind of temporary savings. Obviously, you said you're kind of looking into where you've learned new best practices and how you can perhaps try to hold on to some of those. Do you have any kind of guide or sense of what kind of percentage of those temporary savings do you think you should be targeting to keep hold of, 10%, 20%, 30% of that? Or do you think it's just too early to say?
Yes. Charlie, thanks for your questions. So first of all, on the being on track for the EUR 120 million, that is a resounding yes. I think that hasn't changed and then we will be delivering on that. So that is a clear answer there. On the cost savings, the temporary cost savings, I would say, some of the cost savings will definitely continue during the second half. Now there is some, and I think, Maarten, you alluded on that, there is advertising and promotion, which in certain cases actually goes together with the volumes and what you do in the market. So there's some linearity on how much more you do in the market, and therefore, those budgets go up. Travel, I think, will also start moving up again, but not to the extent probably as it was before. Now we alluded to that before that we went this year very strictly for all of the employees in the company to a personal travel wallet, which is actually managed very, very vigorously to the company. And therefore, I think we have a view that our travel spend will continue to be significantly below what we did in 2019, probably somewhat up from the second quarter because that was, of course, exceptionally down. Having said that, I think with the Executive Committee, we really are very vigilant to put the spend in line with what the margin income is so -- and that we keep it relative to that and not start getting into any other situation. Maarten, I don't know if you want to comment on the temporary savings, but I think it's implicit in my answer. I think that some things will trickle through. We do look a lot. We indicated on this Paint the Future challenge for our employees where -- which was really focused on, right, we've been doing this now for 3, 4 months, what should we keep on doing. And a lot of them, not surprisingly, are travel avoidance, technical service long distance, which actually are all nonproduct-related spending that also is, I would say, positively impacted, so less spend that comes out of that. It's probably a little bit early to put percentages on it. But I think in the 15 by 20, I would say, Charlie, it's really cheap are us, I would say, so we never miss a beat to try to not spend money.
Yes. Just to add. So we remain very frugal, of course and it very much also depends how the businesses will evolve. So when we will see more strength in some of the businesses or some of the geographies, we will start to spend obviously more advertising and promotion. As an example, we will see travel at a certain moment coming back again. But yes, on the other hand, we will also look, together with the Executive Committee, are there new ways of working and can we retain -- structurally retain part of these temporary cost savings. But I think it is a little bit early to say yet, to make definitive statements around this.
I would just say, Charlie, I mean, maybe a little bit in closing that if you -- I think that what really is something that makes us proud around here in Amsterdam is the resilience of the company. If you really plug in the revenue numbers that we had in the second quarter due to COVID, if you plug those revenue numbers on the second quarter 2020 in, for example, the second quarter 2018, with the lower margins we had and with the higher costs we had, you would see a really dreadful quarter happening. So the self-help, if you look at this quarter, a big part of it has been the self-help that we've been doing in the last 2 years. And alluding to the costs, et cetera, that is still very much the mantra. So there is still a lot of self-help in the company to do. And I think that has proven some of the financial resilience that hopefully we've been demonstrating in the second quarter. And that's going to be also for us a reality in the second half of this year.
That's really helpful. Maybe just one last one really quickly on pricing. Just as we think about the mix, I mean, you've kind of alluded to the fact that refinish will slowly come back through the year. It seems like European Deco is at least trending positively through the end of Q2, so it should continue for a little bit. You'd expect that there's a bit of inventory pull, et cetera, into Q3. So just -- is it fair to assume now that pricing will remain kind of small single-digit positive for the full year, and therefore, we won't see kind of a second half where it moves kind of sequentially meaningfully lower? So more kind of a sequentially flattish looking kind of price/mix for the group?
Yes. Charlie, I would love to say a resounding yes or something else on that question, but there are so many movements between different segments and different regions on that. So if we look at our 140 performance cells, they're all kind of moving up and down. So it's difficult to take a definitive statement. I think, definitely, what is correct is that we will hold price. So we definitely -- that is clear. And then it's going to be whatever the mix is that comes out. I don't know, Maarten, if you have more of a crystal ball on them.
No. But that is -- I mean that has become also part of our margin management mantra where we moved from purely price managing the margin. But indeed, we will see -- we will continue to see kind of volatility in the business and uncertainty, which we have to manage basically going forward.
But pricing discipline, and that's related to margin discipline, is definitely the mantra internally for the second half also.
Okay. Thank you, everyone, for joining our investor update for Q2 2020 and your questions during the call. A replay of the webcast is available on akzonobel.com. If you have further questions, please feel free to contact Investor Relations. Thank you, and have a good day.
All right. Thanks, everybody.
Thank you.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.